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153 IRET Congressional Advisory 1 (2003)

handle is hein.taxfoundation/iretcgadv0150 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. April 15, 2003 Advisory No. 153 TOBACCO SUIT SENDING ECONOMIC STIMULUS UP IN SMOKE? President Bush has proposed a tax cut of $726 billion over ten years to spur the economic expansion. The Senate has voted to cut it to $350 billion. Bowing to Senate pressure, the House allowed for a $550 billion tax cut in its Budget Resolution, and the President reluctantly agreed. Meanwhile, the (so-called) Justice Department has filed a lawsuit demanding nine tobacco companies, to be paid over some unspecified period. If collected over the same ten years as the President's tax cut, it would take back 40 percent of the President's original tax proposal, 60 percent of the scaled back House amount, and over 80 percent of the Senate's smaller tax cut. Does anyone notice an inconsistency in this policy mix? $289 billion from Modem tax theory doesn't merely measure the effect of tax changes by their dollar value. Rather, it looks at their incentive effects or their impact on resource allocation. Even on that score, this money grab would be a bad move. The Justice Department claim would act like a selective excise tax on cigarette consumers and producers. Since the companies cannot print money [Tihe (so-called) justice Depar-tment has filed a lawsit demanding $289 billion friom nine tobacco companies... [It would take back 40 per-cent of the Pr-esident's or-iginal tax pr-oposal, 60 per-cent of the scaled back House amiount, and over- 80 per-cent of the Senate's smnaller- tax cut. Does anyone notice an inconsistency in this policy mix? Justice's new federal tobacco claim is on top of the 25-year $280 billion settlement the companies reached with the states in 1998. President Clinton then pushed for a federal lawsuit, which we labeled taxation through litigation instead of legislation (IRET Congressional Advisory, No. 80, May 4, 1999). That suit was apparently laid to rest, but like Dracula, it has arisen undead and with impressive fangs. Presidents come and go, but the bureaucratic agenda lives on. falls on a single or operate at a loss, the entire fine (if it survives a trial) would have to be paid by several tens of millions of cigarette smokers (via higher retail prices), tobacco farmers (lower commodity prices), company employees (lower wages) and shareholders (lower dividends). Although the tobacco tax, or its fine equivalent, is widely regarded as falling on consumption, not income, increasing it would still be bad for the economy because it product and distorts economic behavior. People work and save to earn money to buy things. Excise taxes make consumers less able to buy the things they like in the proportions they like. For any given amount of revenue raised, excise taxes make people less happy and less willing to produce than would an evenhanded broad- based consumption tax. Excise taxes are bad tax policy. g~*m kfl S I 6g~ 8 ~eg

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